Are Low Wages Stalling America's Economy?

1955. Eisenhower. Cold War. Cars with big fins. That was the last time that wages as a share of national income were as low as they are today.

Some actually think this is good news. Enhanced competitiveness in a global economy and all that. But not surprisingly, the economy is failing to respond well to this phenomenon because, as the following article explains, all those wage earners also happen to be consumers. And since they are not making as much income as did their grandparents almost sixty years ago, they are not spending as much either.

It is not clear why this apparent correlation fails to move policymakers or corporate executives. Perhaps winner-take-all income disparities have insulated those in a position to initiate change from the economic consequences of the status quo. Or perhaps the broader populace has become inured both to the level of performance and to its implications for the future. It is conceivable, however, that the trend line will simply have to negate itself given historic tendencies towards reversion to the mean, as well as the cyclical imperatives that global economic trends command, to say nothing of whatever moral or political reactions it may inspire. JL

Rex Nutting comments in MarketWatch:

Slow income growth means consumer spending has grown slowly. Most households are still trying to avoid taking on too much debt (like they did in the 2000s), so they don’t have the purchasing power to buy the additional goods and services that the economy could be producing.
Low wages are holding us back. Since the official end of the recession more than four years ago, the average wage has barely kept up with inflation, even though workers are more productive and are creating more profits for the owners they work for.


Since June 2009, real average weekly earnings have increased 0.3% per year , even as productivity has increased 1.5% per year. Most of the income gains have gone to the highest paid workers, including the bosses. Real median weekly wages have actually declined 0.8% per year since 2009.
If those additional goods and services can’t be sold, then businesses won’t hire the workers who would produce them, nor will they invest in the buildings or equipment that would be needed.
The U.S. economy relies on consumer spending to drive growth, but consumption is stuck in second gear. With consumer spending growing at less than 2%, it is no surprise that gross domestic product is also stuck in the 2% range.
Stagnant wage growth isn’t a new trend — it began in the late 1970s — but the Great Recession and its slow aftermath have amplified it. While corporate profits are near a record high as a share of national income, the workers’ share has dropped to the lowest level in nearly 60 years.
After adjusting for inflation, median wages are no higher than they were in 1979.
The freeze in workers’ earnings since the 1970s has been caused by many factors, including technological change, increased competition from workers in countries that pay lower wages, and reduced bargaining power due to the decline of unions and the ascension of corporate power. And more recently, wages have been depressed by the high unemployment rate. Read more about the 40-year slump.
Unfortunately, the drop in the unemployment rate over the past several years hasn’t translated into higher wages. But at least they are no longer declining. In the past year, real median wages are flat. President Barack Obama threw his weight behind an increase in the minimum wage in a speech on inequality on Wednesday. The Republican-ruled House likely wouldn’t go along with an increase in the federal minimum wage, but several states and cities are increasing theirs. Obama could even sign an executive order to raise the minimum wage for federal contractors.
The problem of stagnant wages isn’t just about the very bottom of the ladder, however. It’s not just about wages at McDonald’s /quotes/zigman/233369/delayed/quotes/nls/mcd MCD +0.50%  and Wal-Mart /quotes/zigman/245476/delayed/quotes/nls/wmt WMT -0.40%  . Slow wage growth is the rule for the bottom 75%. It’s not that the working poor are falling further behind the middle class; it’s that everybody else is falling behind the top 5% or 10%.
Some people — Pope Francis comes to mind — argue that low wages are immoral. There’s a lot to be said for the argument that anyone who works hard ought to make a living wage.
But the argument against stagnant wages doesn’t rest solely on an ethical belief. Stagnant wages are economically inefficient because they hold back both consumption and investment.
While most of us are spending almost everything we earn, it appears the rich may simply have more money than they know what to do with. They aren’t spending it, and their investments are doing little to increase the economy’s productive capacity.
The economy is stuck in a kind of Catch 22: It can’t grow at its potential unless consumers spend more, but stronger consumption is impossible without the higher wages that faster growth would bring.
The only way to make the economic pie bigger is to give workers a larger and fairer share, in line with what they earned in the golden days of the American economy of the ‘50s, ‘60s and ‘70s.
Workers, unfortunately, don’t have the economic or political power to get it. And so we are stuck in a slow-growing and increasingly inequitable world.